Analysis of the Determinants of the Demand for Money in the Franc Zone: A Study of Panel Data

Author(s)

Rémy Hounsou ,

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Volume 6 - February 2017 (02)

Abstract

This study uses panel data covering the period 1985-2015 to analyze the determinants and long-term behavior of the demand for money function in the Franc Zone. The empirical results based on OLS, FMOLS and DOLS methods suggest that monetary aggregates in the narrow sense (m1-p) or in the broad sense (m2-p) are related to the following internal explanatory variables: income, inflation and credit to the economy and the following external explanatory variables: the change in the real exchange rate of the CFA Franc relative to the US dollar and the difference between the interest rate on deposits in France and that of the countries in the Franc Zone. Moreover, the results indicate that these variables are for the most part non-stationary in level but that there exists between them a long-term cointegration relation which makes the two functions of demand for money stable. These results are robust and attest to the usefulness and effectiveness of the econometric analysis of non-stationary panel data in the institutional framework of the Franc Zone

Keywords

money demand, Zone Franc, Panel data, Unit root tests, Cointegration tests Classification: JEL: E41, C33, O55

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